As buzz surrounding the UN climate change conference in Bali continues to grow, countries worldwide are creating or ramping up their own strategies to combat climate change. Even the US has jumped into the fray, with cities and states and even companies (think GE, GM, Alcan, Dow and DuPont, Alcoa, PepsiCo and Xerox) devising their own plans in the absence of any action from Washington and lobbying the government to take the leap.
Countries are increasingly integrating carbon market strategies into policy formulation. For example, just as you can buy, sell and trade the rights to emit sulfur oxides (SOx) and nitrogen oxides (NOx) in the US, the EU’s Emissions Trading Scheme (EU-ETS) lets you do the same for carbon dioxide. Basically acting as a policy instrument, this sort of cap-and-trade initiative provides economic incentives to reduce greenhouse gas emissions.
However, the design and implementation of carbon markets reflect differing imperatives between developing and developed nations, raising questions about how they are developed and what it would take to link them together into a single global carbon market.Cap-and-trade systems, carbon taxes, renewable energy obligations and technology standards are among the different emissions management approaches being proposed and used, each resulting in a different cost of carbon emissions. These differing costs mean that trading between the different schemes is difficult at best. But linking the different emissions management approaches together could create a single market and single cost for carbon emissions, much like global financial markets work today. It could also provide equal access to low-cost reduction opportunities in both developed and developing nations.
A global carbon market will also need a multilateral approach to linking the disparate markets together, because different countries have different carbon emissions levels. In some countries, especially newly emerging economies, emissions are on the rise, while in others they are reaching a plateau or reducing.
Building a global carbon market based on global financial markets would also require the development of a global registry and market instruments allowing international trading and an expanded role for project-based mechanisms (such as the Clean Development Mechanism under the Kyoto Protocol).
Additional elements such as equitable pricing measures, penalties for non-compliance, facilities for banking and borrowing, requirements for monitoring and reporting, and offset policies, as well as an oversight body and stringent checks and balances, would also need to be addressed, again like those that regulate global financial markets.
Key to linking these markets together is a secure and integrated international regulatory framework post-2012 when the Kyoto Protocol will expire, the very subject that so many people are focusing on in Bali and where political chiefs are expected to come up with a new master plan to fight climate change, or rather a blueprint for further negotiations to reach that master plan.
The WBCSD’s members, conscious of the opportunities that could be seized in this arena, have pulled together a thought piece on creating a global carbon market. Establishing a Global Carbon Market: A discussion on linking various approaches to create a global market explores the possibilities for linking differing national approaches. The paper basically says that, if done well, linking national initiatives in various parts of the world and establishing a global cost of carbon could unlock enormous efficiencies, providing access to lowest cost emissions mitigation opportunities to developed and developing countries alike.